NEW YORK -- U.S. government bond prices dropped Friday after a report showing unexpected strength in the labor market, which postponed bond investors' expectations for interest rate cuts from the Federal Reserve.
The employment report showed the U.S. jobless rate fell to 4.4 percent in October, the lowest in more than five years, which derailed a Treasury bond market rally that had pushed yields down to one-month lows earlier this week. Bond yields and prices move inversely.
"The bond market did not get verification in the employment numbers to continue the rally. This will take some of the wind out of the market's sails," said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley in Purchase, New York.
Benchmark 10-year notes fell 21/32 in price for a yield of 4.68 percent, versus 4.60 percent just before the report and versus 4.60 percent late Thursday.
"The employment situation remains on the tight side; the focus being not just the unemployment rate dropping to 4.4 percent but the upward revisions to the prior months' employment numbers," said Flanagan. "A Fed ease will come later rather than sooner," he added.
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After the jobs data, U.S. short-term interest rate futures erased all previously expected chances of a Fed interest rate cut in January.
Two-year notes - which respond closely to expectations for Federal Reserve interest rate moves - fell 7/32 in price to yield 4.80 percent, versus 4.67 percent just before the report and compared with 4.68 percent Thursday.
That was on track to be the biggest daily spike up in the two-year note's yield for about 18 months.
A survey of the service sector is due at 10:00 a.m. . Analysts expect the October Institute for Supply Management's nonmanufacturing index to rise to 54.5 from 52.9 in September.
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